Thinking about future – saving for retirement

A great article from the New York Times this week – immigrants should be aware that saving is very important as there is no guaranteed government or other support in retirement.

A Path to Retirement, for Those Far From It

MAY 3, 2014

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By JEFF SOMMER

There is a big retirement problem in America, maybe even a crisis. Many working people won’t have enough money to leave their jobs and live in comfort and security. How many are in jeopardy is debatable, but the problem’s existence is not.

What’s to be done about it? Strengthen Social Security, certainly. Make it easier and safer to invest in workplace retirement accounts like 401(k)s. Shore up traditional defined-benefit pension plans where they still exist. All of these remedies are important.

But even if action occurs on all of them, working Americans will still need to take steps of their own to secure a safe retirement. Plenty of people offer suggestions for how to do that, but they often expect a slice of your hard-earned money, sometimes for advice and services that aren’t worthwhile.

That’s why “If You Can,” a concise, no-nonsense instruction manual on saving and investing for retirement, is so welcome. It’s by William J. Bernstein, an investment adviser and author on financial subjects, who is making it available free as an e-book, no strings attached, on his website. (It’s also available on Amazon.com for 99 cents, though Mr. Bernstein is giving it away free there, too, on certain days, including May 4 and 5, as posted on his site.) This pamphlet could be extremely helpful, especially for the group that Mr. Bernstein is specifically targeting: younger people who aren’t yet in the work force or have just started their careers.

In his advisory business, he is aiming at a different group: rich people with portfolios of at least $25 million, who pay him for advice and other services. But he said the “If You Can” guide is “entirely eleemosynary” (or a charitable offering, if you don’t feel like running to your dictionary). “I hope some of the people who use it will become rich, but I don’t expect to be around when they are,” said Mr. Bernstein, 65.

He says he is focusing on people in his grandchild’s generation, as “there’s still time for them to get this right.”

“If You Can” is a snappy 7,000-word guide that doubles as a financial-education curriculum, complete with additional reading assignments and a lesson plan. He hopes to help people put away enough money and to invest it wisely enough so that their futures will be secure.

Like John C. Bogle, the founder of Vanguard, whom he admires, Mr. Bernstein views Wall Street as a largely parasitic enterprise that flourishes at the expense of ordinary investors. “You are engaged in a life-and-death struggle with the financial services industry,” he warns in the pamphlet. “Every dollar in fees and expenses you pay them comes directly out of your pocket.” He recommends using basic, low-cost index funds whenever possible.

His plan is simple, but not easy. “It makes some serious demands,” he said in a phone conversation. Indeed it does, starting with the injunction to save at least 15 percent of income beginning no later than the age of 25, and continuing every year until retirement.

Saving 15 percent for a purpose that is decades away requires commitment, especially when it’s not all you’ll need to save: For example, it doesn’t include money for a rainy-day fund, a home’s down payment, a car, a child’s education, a vacation, a wedding, a bar mitzvah, a sweet 16 or anything else. All of that comes on top of the retirement savings. Yet in Mr. Bernstein’s view, that 15 percent is a bare minimum. “You’ve got to accumulate enough money on your own to replace your income one day,” he says. “You’re much better off if you start doing that early.”

Older people who didn’t save enough when they were young need to save more than 15 percent now, if they can. Often, they can’t, which is why so many people in the work force face serious problems, and why Mr. Bernstein is appealing to younger people who can still help themselves.

Note, for a moment, what Mr. Bernstein isn’t even attempting to do. He isn’t advising baby boomers — as a generation, anyway — because he isn’t optimistic about boomers’ overall prospects.

“About one-half of boomers are already in trouble,” he says. “They haven’t put enough money away and it’s going to be hard for them to do it now.” His back-of-the-envelope estimate of the current working population’s lack of preparedness isn’t out of line with the assessments of researchers who’ve spent considerable time on the subject. The Center for Retirement Research at Boston College, for example, puts the percentage of all households at risk “of being unable to maintain their pre-retirement standard of living” at 50 percent. The nonpartisan Employee Benefit Research Institute puts the proportion of baby boomers at risk of running out of money in retirement at 40 to 50 percent.

It’s never too late to improve your individual situation — and public policy solutions may become more realistic if enough people get involved. But whatever policy shifts are possible in America, it’s still extremely likely that most people will need to rely primarily on themselves to finance a comfortable retirement. Hard as that may be, it’s easier if you start early.

Mr. Bernstein, who lives in Portland, Ore., switched to finance and writing after a career as a neurologist. He acknowledges that he’s well off himself; he says he wants to help others who aren’t.

Saving can be very tough, he says, especially when you’re just starting out, so he provides suggestions on how to manage a limited income. They include standard measures like cutting back on lattes, expensive cable TV and cellphone packages, and purchases of high-end sneakers, restaurant meals and the like. In the end, it’s an individual choice, but you may have to give up some things you want.

“Life without these may seem spartan,” he writes in the pamphlet, “but it doesn’t compare to being old and poor, which is where you’re headed if you can’t save.”

In addition to the 15 percent savings rate, his simple prescriptions include using three index funds, held in equal proportions: an international stock fund, a domestic stock fund and a bond fund. The portfolio should be rebalanced — restored to a proportion of one-third each — once a year. That’s it, in a nutshell.

Yet, as he points out, formidable hurdles are ahead for anyone with constrained resources and the need to accumulate money for the future. Aside from the constant temptations of consumerism and the depredations of Wall Street, he says we must all struggle with basic human psychology that makes it very hard to avoid panic selling when markets are low and greedy buying when they are high. So his pamphlet includes a course of study intended to supply enough knowledge and self-awareness to “maintain strict long-term discipline in saving and investing.”

Sadly, he says, unless we know what we need to do and have the discipline to do it, the odds will never be in our favor.